Long-term or Short-term

One of the reasons I started writing this was to keep track of the reasons I bought a stock and to keep some on my watchlist. By that I don't mean just the ticker symbols, but the thought process; in essence to keep track of what I thought, to make myself more accountable for what I did and to learn from my mistakes as I go. Often, I have sold my winners too soon and held my losers too long. Why is it, one wonders, that so many of us end up becoming long-term investors on losing stocks- holding on to them forever and aggressive Get-In-Get-Out traders on winning ones, when really we should be doing it the other way round?

Another thing that strikes me is something that I learnt from Peter Lynch's book "One up on Wall Street" - if a stock goes up after you bought it doesn't mean you're right and if it goes down doesn't mean you're wrong.. in fact I need to be clear on the reasons why I bought or sold a stock before I buy it. Of course this doesn't mean that I should focus only on the fundamentals or the chart patterns, but whatever it is, I need to be clear about it.

My philosophy about "ultra" long term investing is that it's good only for my 401-k plan because I know :

• For a fact, unlike some companies, a mutual fund portfolio is not going to go bankrupt or go from 400 to 4
  
• Dollar cost averaging every 2 weeks ensures I dont buy in at the wrong time.

However when I'm trying to pick individual stocks, which I'm trying to do one, because I think I can do better and two because it's something that keeps my mind(brain?) busy (Talk to sparun if you'd like to know what this can do to your longevity)

So then does that make me a short term trader by default? No not that too. By definition I guess a long term investor is someone focussed solely on fundamentals and valuations. A short term trader needs to be totally good at analyzing chart patterns and trend lines. I guess I'm trying to find that sweet spot - the golden ratio between technical and fundamental analysis.

Here's a thought experiment: Imagine two people - F and T one focussed solely on fundamentals(F) and one focussed solely on technicals(T) both very good, not perfect. Why would both get suboptimal results? What's the optimum solution?

• F can usually pick out stocks when they are extremely undervalued but will either get out much before the stock peaks (P/E is too high - the stock is now overvalued) or much after(The dip is a buying opprtunity until the company announces really bad results)
• One the other hand T waits for a trend to form, the confirming price-volume signals and gets in. Sometimes these trends might break and T takes a loss and gets out. However T really has to wait for a trend to take shape or risk being caught in market whipsaws. Of course once the trend has formed, T can ride it very close to the peak and get out just when the trend starts to break. The problem though is that a trend needs at least three points.

One can build a similar scenario when a stock is going down.

Hence I think a correct balance between fundamental and technical reasoning is possibly the best scenario. Potentially it could also be the worst if used in the exactly opposite way. Moving along I'm going to find out.

The Markets and a new trade: Bought: Interactive Data Corp (IDC) @19.68

The market has rebounded nicely these past weeks. The volume on up days has been higher compared to the down days. Also the nasdaq seems to have found support around the 50-day moving average which so far this year seemed to be acting like a resistance.

My most recent trade this week has been Interactive Data Corp(IDC) @19.68

• The company recently reported earnings and the stock reacted favourably. This is important, since it's become hard these days to second guess the direction of a stock on earnings, not to mention trying to second guess the earnings itself, which is still harder.
• Stock hit a 2-year high and this is after an extended period of consolidation in a trading range between 16 and 18.
  
• Betweem 4/12/2004 and 8/13/2004 the stock has found support at the 200-day MA. More importantly the 50-day MA has found support at the 200-day before the breakout.
• The company is 60% owned by Pearson plc(PSO). There's no reason for me to think PSO will iquidate stock soon. Sep. and Oct. shares shorted were 1.52M and 1.10 M respectively. Given the average volume, a short covering should be in order. Currently the short ratio is around 10.5 days (October)
• Fundamentally the company looks sound with no debt and (Book value+revenues) around $13. It has a good suite of products: FT Interactive Data, CMS BondEdge, ComStock and eSignal . They seem to be doing some interesting things with providing data to the Blackberries of the world. I've heard from people who work in finance that the Blackberry is really popular in the finance area It looks like some of these products should be and easy sell to those people.

So much for now. I'll keep an eye out for the breakout.

Quotes from Yahoo

I'll try to keep this updated for the companies that I talk about. It'll be a quick check to see how they have done since last time.

Current quotes on some companies mentioned

This is a test

This is a test